Tax Tantrum Tuesdays: Stay Out of Trouble

Another finance guru I absolutely love, Mellody Hobson, President of Ariel Investments in Chicago, talks about personal finances on Good Morning America from time to time. Specifically, I was reading an article discussing the IRS's increase in tax audits. Every person I know, including myself, should be very, very afraid of the IRS. Not afraid to the point that you are scared to try to do your own taxes, but afraid to the point that you don't ever want to purposefully lie to them. Ever.

When I hear of people lying to the IRS about small, insignificant things like filing single when you're actually married, claiming kids who aren't yours, claiming your kids when you know your 'baby momma' already claimed them, I send up a quick prayer...because if the IRS finds out, they're cleaning you OUT. Believe me, you don't want it. Most of the time, actually, ALL of the time, it's just not worth it.

With that being said, there are some obvious red flags that the IRS looks for when they're determining who to audit. Statistically, only about 1% of Americans with annual incomes under $100k get audited. The more money you make, the higher the probability that they will want to audit your return. Additionally, your return is more likely to get audited if you have big changes from one year to the next. It sends up a red flag. So if you start making a ton more money, claiming three children as dependents when last year you only claimed one, or claiming a large deduction/credit that you don't normally claim, BE SURE to keep those records.

Other more specific red flags for the IRS are:

• High expenses. A lot of expenses are deductible as itemized deductions. If any of these are abnormally high, like $60,000 in medical expenses, or $10,000 in work related expenses, you should make sure you have some great documentation to prove you're not lying.
• High charitable deductions. People use charitable deductions ALL the time to beef up their itemized deductions. Be careful. Make sure you have check stubs, receipts, letters from non-profits detailing how much money you gave them. Mellody says that the average charitable donation is around 2% of one's income...so if you're donating around 10%, that may be cause for concern.
• Errors. This is easily avoidable because of all of ability to e-file. But if you're still using a paper return, make sure to double check your math, make everything nice and neat as to not arouse any questions from the IRS.

In general, just be honest. It's much better for you in the long run. If you made an extra $10,000 cash doing some kind of side hustle, don't hide it. The amount of tax you'd pay on that would be far less than the penalties and fees the IRS will hit you with if they ever find out.